The future of US-China relations

Hammering this out on the mini Lenovo, about the size of an iPad, that accompanies me all over the world, I cannot but feel apprehensive at the prospect of friction between China and the US. It isn’t only American warships prowling in the South China Sea. It’s China’s financial reach. In the 12 years since Lenovo acquired IMB’s ThinkPad business, China has sunk $170 billion in American non-bond investments alone. The game didn’t change as Kim Jong-un’s bullet-proof train trundled across the border. The message of Chinese importance only became more emphatic.

For all his huffing and puffing, Donald Trump might come a cropper if Xi Jinping, now virtually president for life, or Yi Gang, his newly appointed governor of the People’s Bank of China, call in the $1.17 trillion (20 per cent of the public debt) Washington owes Beijing. China is the US government’s largest lender - outstripping even Japan. The two economies are yoked together in perilous (some might say promiscuous) prosperity. Much may hang on what Xi told Kim this week.

According to one version, like the Celestial emperor summoning a vassal for a strict accounting, Xi demanded a full explanation of the proposed talks with Trump. Another interpretation is that Kim sought China’s backing in his very first encounter with a foreign leader. Either way, Xi will be the elephant in the room at next month’s Trump-Kim meeting, with South Korea’s president, Moon Jae-in, hovering in the background. Indians should remember China’s military might or oratorical bombast doesn’t give it this pre-eminence. Its financial clout with the world’s largest foreign-exchange reserves at $3.1 trillion, reflecting a robust economy, does. 

The yuan’s exchange rate partly accounts for China’s hold on the US. When the dollar falls, China, with its insatiable appetite for foreign investment, buys dollars through US Treasury bonds to support it.  Wanting market forces to have a greater impact on the yuan’s value, China began relaxing its peg in 2016. As a result, the dollar-yuan conversion became more volatile but China’s influence on the dollar remained. The $375-billion trade deficit with China is another major worry with the US anxious to reduce it by $100 billion at least. But can it? The US exports only $130 billion to China against imports of an awesome $506 billion. Not that these purchases are to help Chinese exporters. It happens that Chinese consumer electronics, clothing, footwear, plastics and machinery are cheaper. Many of these products are manufactured by American firms that send raw materials to China for low-cost assembly. Once shipped back to the US, they are treated as imports. Someone should tell Trump that the American cost of living will rise sharply without cheap Chinese domestic goods.

It must rankle with Washington that this indebtedness makes the US economy in a sense hostage to China. North Korea’s nuclear and missile programmes and the evidence of Kim’s visit to Beijing — his first anywhere since assuming the leadership — can only further strengthen China’s hold, financial and diplomatic. Xi controls the fuel pipelines and other logistical supplies that sustain North Korea. He alone can fund Pyongyang. Xi can’t sack Kim. But he can save him. That would call the bluff of a hawk-like Trump’s new national security adviser, John Bolton, who makes no bones of his hope that the Trump-Kim talks will fail so that the US has an excuse for another devastating Korean war.